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This article first appeared on Simply Wall St News.
Berkshire Hathaway Inc. (NYSE: BRK.B) appears to be aiming for new highs, with the company announcing a 21% profit increase in the second quarter.
The company maintains cash reserves at US $ 144 billion, although it carries US $ 113.1 billion in debt on its books. Today we’ll take a look at the balance sheet and come up with a theory as to why the company continues to raise cash and go into debt simultaneously.
Q2 2021 results
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Operating profit US $ 6.69 billion, US $ 1.18 billion Y / Y
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Quarterly repurchases US $ 6 billion, YTD US $ 12.6 billion
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Second quarter net income of US $ 28.1 billion or US $ 12.33 per Class B share
Warren Buffett continues to buy back shares. After record buyouts in 2020 ($ 25 billion), he maintains a similar pace so far in 2021. Analysts who have followed his actions over the decades know he prefers to buy companies at 10 times earnings before. taxes more cash or better. However, he is a disciplined buyer who waits for the best time, even for his own business. Buybacks slowed in May after Berkshire hit a new all-time high; therefore, it is worth keeping an eye on the buyback volume as the price revisits these levels.
See our latest review for Berkshire Hathaway
What is Berkshire Hathaway’s debt?
As you can see below, at the end of March 2021, Berkshire Hathaway was in debt of $ 113.1 billion, up from $ 104.2 billion a year ago. Click on the image for more details. However, he has $ 145.4 billion in cash, which makes up for that, leading to a net cash of $ 32.3 billion.
A look at the responsibilities of Berkshire Hathaway
According to the latest published balance sheet, Berkshire Hathaway had liabilities of US $ 128.2 billion due within 12 months and liabilities of US $ 300.0 billion due beyond 12 months. In return, he had $ 145.4 billion in cash and $ 39.1 billion in receivables due within 12 months. It therefore has liabilities totaling $ 243.7 billion more than its cash and short-term receivables combined.
This deficit is not that big as Berkshire Hathaway is worth US $ 653.3 billion and could therefore probably raise enough capital to consolidate its balance sheet if the need arises. However, it is always worth taking a close look at your ability to repay your debt. Berkshire Hathaway has a net cash position despite its notable liabilities, so it’s fair to say that it doesn’t have a lot of debt!
Even more impressive was the fact that Berkshire Hathaway increased its EBIT by 897% year over year. This boost will make it even easier to pay down debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Berkshire Hathaway can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also essential because a company cannot pay its debts with paper profits; he needs hard cash. While Berkshire Hathaway has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow to help us understand how fast it’s building (or erodes) that cash balance. Over the past three years, Berkshire Hathaway has recorded free cash flow of 37% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
In summary
Although Berkshire Hathaway has more liabilities than liquid assets, it also has net cash of US $ 32.3 billion. And it impressed us with its EBIT growth of 897% over last year due to the rapid recovery from a slowdown.
While the company can pay off debt quickly, we believe it maintains a high level of cash flow as investments that match its style are scarce in today’s historically overvalued market. In a low interest rate environment, the business can manage debt “on the go” while keeping a large reserve of cash ready to take advantage of any opportunities.
When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Berkshire Hathawayyou should know.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St do not have positions in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.
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